One of the biggest life events that a person faces is buying their first home. Whether you’re newly married, straight out of postsecondary school, or decided to stop renting later in life, the housing market is a tough one to break into for first-timers.
That’s because housing prices are reaching all-time highs. The national average sale price of a home increased 3.4% year-over-year in May 2022, according to The Canadian Real Estate Association. The national MLS HPI Benchmark price of a home in May 2022 was $822,900.
Add to that the fact that interest rates are rising. On June 1, the Bank of Canada increased its policy rate 50-basis points to 1.5%. Experts predict there will be several more hikes before year-end, with the policy rate reaching as high as 3% by the end of 2022 to battle inflation.
Higher interest rates mean higher mortgage payments for homebuyers. And with housing prices already so high, buyers are facing an uphill battle.
Here are some tips to help first-time homebuyers during these tougher times.
1. Start saving and build cash flow.
A cash flow plan can help you find more money to invest in a down payment, which is a minimum of 5% of the first $500,000 of the home price, and 10% for the difference. CacheFlo’s app, Winton, can help keep spending on track. It provides a spendable, and lets you know how much cash flow you could free up by following its recommendations. The best part? You’ll have this convenience at the touch of your finger via your phone, at any time of day.
2. Reach out to a mortgage broker.
Shopping for the best rate is key, especially as interest rates rise. A mortgage broker can help you by analyzing your finances, then taking your details to various banks and lenders in order to get the best rate. A broker can also explain how other variables, like amortization and principal, can have a significant impact on the cost of repaying debt.
3. Learn about variable and fixed rates.
Understanding the difference between variable and fixed rates is important. Variable rates are based on the lender's prime rate minus whatever discount the lender offers. These rates can change each time the Bank of Canada changes its key rate, which means your monthly mortgage payment can go up or down several times a year. Meanwhile, a fixed rate typically means a higher mortgage payment, but provides you peace of mind because your payment is locked in for one to five years.
4. Take advantage of government incentives.
The federal government offers a First-Time Home Buyers’ Tax Credit. In years past, the non-refundable tax credit was based on an amount of $5,000, and calculated using the lowest personal income tax rate for the year. For instance, for 2022, that’s 15%. So you’d get a tax credit of $750 on your 2022 return. But during this year’s federal budget in April, the government proposed to increase that amount to $10,000. So now, the tax credit would essentially double to a maximum amount of $1,500 for homes purchased after January 1, 2022.
The government also offers a First-time Home Buyer Incentive. It offers 5% or 10% of a home’s purchase price to be put towards a down payment, says the National Housing Strategy. The Incentive is a shared-equity mortgage, which means the government has a shared investment in your home. The Incentive works two-fold in that the first-time buyer may not have to save as much for their down payment, and the larger down payment could result in a smaller mortgage, which means lower monthly mortgage payments. The caveat is that you will have to repay the Incentive based on the property’s fair market value at the time of repayment, either 25 years or if the home is sold before then.
Finally, there's the Home Buyers’ Plan (HBP), which allows homebuyers to withdraw up to $35,000 from their RRSP to put towards buying a home. You have 15 years to repay the total amount into your RRSP. Each year, you’ll have a chance to repay the annual amount owed into your RRSP. If you don’t pay it, it’ll be added as income and could push you into a higher tax bracket, which would result in paying more taxes that year.
5. Think about the softer side.
Buying a home isn't just about finances. It's also about owning the home of your dreams. Find a realtor who truly understands what your must haves are in a home. Perhaps it’s to be near a school if you’re planning to start a family. Perhaps it’s to have an upscale backyard with a deck and fire pit because you like to host events. Whatever it is, knowing what your deal breakers are when shopping for a home can save time and help create memories that will last a lifetime.
So as housing prices soar and rates continue to rise, don't fret. Creating a cash flow plan, saving for that down payment, and shopping for the best rates can help any hesitant buyer afford the home of their dreams.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allows them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.